CFA Society Singapore
SINGAPORE (Oct 23): CapitaLand Commercial Trust (CCT) on Friday announced its 3Q17 results. DPU rose 2.6% y-o-y to 2.36 cents.
This was due to lower operating expenses, stronger performance from CapitaGreen as well as a one-off gain.
Although the group saw an increase in DPU, Daiwa is still maintaining its “sell” rating on CCT with a target price of $1.39.
In a Friday report, analyst David Lum believes that the trust’s three-year DPU CAGR of –1.4% is unattractive in relation to its 2017-19E DPU yield of 5.2-5.3%, one of the lowest among the Singapore REITs under the research house’s coverage.
“We also regard the redevelopment of Golden Shoe Car Park (GSCP) to a premium grade-A office building at a target yield on cost of 5% as highly risky given the uncertainty of office rents in 2021 when the property should be completed,” says Lum.
Meanwhile, RHB is maintaining its “take profit” call on CCT with a target price of $1.60.
In 3Q17, the trust’s portfolio occupancy increase to 98.5%, driven by higher occupancy at Six Battery Road, Raffles City and Twenty Anson.
CCT also signed up 170,000 sf of leases, with 30% being new leases.
However, in a Monday report, analyst Vijay Natarajan says that rent reversions remain negative.
“While we expect Grade-A office rents to rebound by 5–10% in 2018, CCT is expected to see continued negative reversions as expiring rents of $11.14 psf (2018 average) are still about 20% above current market rents,” says Natarajan.
The analyst is also banking on the group’s transformation on Asia Square Tower 2 (AST2), stating that it can add value over long-term if CCT manages to ride on the office market recovery.
CIMB is maintaining its “hold” call on CCT with a target price of $1.68.
In a Friday report, analyst Lock Mun Yee says, “With the current recovery in the office leasing market, we anticipate a pick-up in spot office rents. Hence, we believe the spread between market and expiring rents should narrow over time.”
The analyst also predicts that the trust’s 4Q17 earnings will benefit from maiden contributions from the AST2 acquisition.
Although DPU is diluted in the near term, Lock still remains positive on the deal as this provides the trust with a Grade A asset to ride the office rental recovery.
“While we like the trust for its pure exposure to the office recovery cycle and ability to rejuvenate its portfolio through AEIs and redevelopment activities such as Golden Shoe Carpark, nearterm upside appears limited,” says Lock
OCBC is also maintaining its “hold” call on CCT with a target price of $1.66.
The trust’s 3Q17 results were in line with OCBC’s expectations.
In a Monday report, analyst Andy Wong Teck Ching believes that rental reversions remain negative as committed rents at Six Battery Road and One George Street were $9.77-$12.50 and $8.63-$9.25, versus average expired rents of $11.88 and $10.65, respectively.
However, a silver lining is the inflection point reached for core Grade A CBD office rents, which rebounded 1.7% q-o-q to in 3Q17, according to CBRE
“This was the first sequential increase in 10 quarters. This augurs well for CCT’s proposed acquisition of Asia Square Tower 2 (AST2), which is expected to be completed in Nov this year,” says Wong.
Wong has adjusted the FY17 DPU forecast upwards by 1.6% and lowered finance cost projection to adjust for the timeline assumed for the debt drawdown of AST2.
Phillip Capital is reiterating its recommendation to “accumulate” with a target price of $1.80.
Rental reversions in 3Q17 were negative, but new or renewal leases signed were negligible.
In a Monday report, analyst Dehong Tan expects this to carry on in 2018. However, Tan says, “Rebound in office rents will reduce the pressure of expected negative reversions in FY18. Nevertheless, DPU outlook is stable.”
As at Sept 30, the trust has a cumulative unused income of $35.7 million, which the analyst believes could be used for future distributions.
CCT’s management has also expressed commitment to utilise its divestment proceeds to make up for loss of income from divestments.
“We forecast a 3% increase in DPU in FY18e, which includes the recent acquisition of Asia Square 2,” says Tan.
DBS is also maintaining its “buy” rating on CCT but with a lower target price of $1.80.
In a Monday report, analyst Mervin Song says, “While there is some disappointment over the short-term dilution to CCT’s DPU post the acquisition AST2 and rights issue, we believe this can be tempered by the distribution of c.$170 million worth capital gains.”
Moreover, the analyst believes that once investors appreciate the benefits of CCT’s asset recycling strategy, the re-rating since 2016 should continue.
Song also believes that consensus target prices -- pegged at a discount to the trust’s current book value of $1.75 -- is unwarranted, given CCT has shown the conservative valuation of its properties via the sale of three office buildings at 14-39% premium to book.
“With office rents rising in 3Q17 for the first time in 10 quarters, we expect increased investor interest in CCT on anticipation of a recovery in the office market to trigger a further rally in CCT’s share price,” says Song.
As at 2.56pm, shares in CCT are trading at $1.66, meeting OCBC’s target price.